Microsoft Plots to Raise PC Prices
April 1999

The argument about whether Microsoft is crooked or not often centers on whether or not the consumer is suffering from the classic symptom of monopolies: higher prices. But this is a weak argument that fails to take into account that prices for almost all commodities and almost all technologies are in a period of dramatic decline. This means that Microsoft pricing does not have to rise in order to be unfair to consumers; it merely needs to fall slower than it would under a free market condition. Furthermore, arguing solely on the basis of price ignores other issues such as poor product quality, lack of alternatives, and wimpy customer support that typically plague monopoly products like Microsoft Windows.

But Microsoft's pricing strategy has seldom been considered a criminal act, an act of monopoly price-fixing intended to squeeze more money out of computer buyers by raising prices. Microsoft has been able to "spin" the arguments to avoid the non-price issues while keeping its long-term pricing strategies a secret.

Until now.

Read carefully the following excerpts from an internal Microsoft memo released during the ongoing federal antitrust case:

TABLE II-1 MICROSOFT STRATEGIES
TO KEEP THE MARKET FROM
CENTERING ON THE LOW COST PC

..... PREVENT LOW-END SYSTEMS FROM
EXPANDING MARKET SHARE

Resist <1k PC royalty price decreases firmly"
....

"We expect the following to happen:

1. Moderately more volume by finding new
buyers who can now afford to buy PCs (This
should be true for consumers as well as small
biz).
2. Acceleration of replacement cycles
(knowing that 80M cannot run NTW or
WIN98)
3. Shortening of PC "life time" in
general.

SOURCE: DT OS Pricing Strategy:
Memorandum from Joachim Kempin to Bill
Gates, December 16, 1997.

Well, what have we here? In order to understand just what Microsoft is doing to the PC marketplace, let us translate this memo into more mundane terms. Instead of an operating system being licensed to PC makers, we will consider the case of automobile tires being licensed to car manufacturers. Now imagine the following memorandum from the tire company's chief licensing officer to his CEO:

"Our plan is to prevent the growth of the sub-$20,000 car market. We must resist price decreases in our tire deals with these low-cost car makers, forcing them to sell expensive cars instead. That way we can charge even more for our tires! As a result of this plan, we can influence the auto makers to sell only to the upper-middle-class car buyer. In fact, growth in the market for cars will be mostly due to rich people buying second or third cars. Forget the poor saps who cannot afford a $20,000 car! Also, we will change our tire design every few months, forcing the wealthy suckers to buy new cars more often just to be able to find tires that fit. Eighty million drivers cannot use our latest tire designs, so they will have to buy a new car as soon as their tires wear out! Hahahahaha! The life cycle of a car will become shorter and shorter, so we will be able to sell more and more tires to these car makers."

Could things be any clearer than that? Microsoft is apparently engaged in a conspiracy to commit price-fixing in the market for personal computers. Read that again: price fixing not merely in the OS marketplace, but in the PC marketplace itself. Note also that Microsoft is not practicing collusion with any OS competitors because it does not have to. Microsoft has a literal monopoly on the price of PC operating systems; otherwise, this scheme would require collusion with their competitors.

Furthermore, Microsoft is conducting a willful, planned course of intentionally discontinuing current versions of its products in order to sell and resell to the same customers over and over, using the PC hardware OEMs as surrogates. By purposely shortening the effective life-cycle of computers by requiring PC makers to change versions unnecessarily, Microsoft raises both long-term and short-term costs of personal computers. Only a monopolist can do this without fear of reprisals.

Microsoft should no longer have the silent blessing of a misled public cheering for a perceived computer-industry success story, or a high-tech underdog battling an "oppressive" government. The ruffians from Redmond now firmly occupy the position of an illegal monopoly practicing wholesale price-fixing. Any phony show of public interest by Microsoft should be ignored both by consumers and prosecutors. The mask is off.

[For further reading on Microsoft and price-fixing, read the
white paper THE CONSUMER COST OF THE
MICROSOFT MONOPOLY: $10 BILLION OF
OVERCHARGES AND COUNTING by the Consumer
Federation of America.]

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Most recent revision: April 20, 1999
Copyright © 1999, Tom Nadeau
All Rights Reserved.
E-MAIL: os2headquarters@mindspring.com